403(b) Summit: The IRS is Coming

May 6, 2009 (PLANSPONSOR.com) - The IRS is not going to regulate 403(b) changes and not follow up, so plan sponsors can expect audits.

Ed Salyers, Senior Employee Plans Specialist, IRS, told attendees at PLANSPONSOR’s 2 nd annual 403(b) Summit what is likely to get them audited and what to expect if they are selected for an audit.

Salyers advised those who have received letters regarding universal availability to respond to the letter or it will be handed to an auditor. Correction is easier than the audit process, he said.

Salyers also said sponsors can help themselves by filling out Box 12 of employees’ W-2s correctly, or they will likely be audited. Usually the audit selection process is random, but those who audit payrolls will ask the employee plans division to audit if an employee is labeled as an individual contractor and the IRS disagrees, he noted.

Also, if an employee is paid by two entities, for example a doctor paid by a medical school for teaching and paid by a hospital for medical practice, the IRS will look at payroll, benefits and processes at both entities for that person, Salyers warned.

Once selected for an audit, the IRS process will include, according to Salyers:

  • An interview with HR and payroll – Sponsors should notify vendors as soon as they are selected since most information requested from the IRS will come from vendors, and sponsors may want to ask vendors or outside counsel to attend the initial interview. The sponsor will be asked if there is anything the sponsor would like to disclose, and it is best to disclose problems up front, Salyers advised.
  • A more in-depth examination of processes – If the initial interview finds incorrect processes or processes that are not well-documented, Salyers said the auditor will issue an information document request (IDR) and will tell the sponsor why it is requesting the information. Salyers added that information should be provided in electronic format as much as possible because it will then be encrypted on the IRS site and will be more secure.
  • Review of transactions – The IRS will look at account balances, loan information and distribution information to detect limit violations. The agency will also review dates of hire to see if the 15-year catch up is being offered properly. It is checking to see if internal controls are in place, Salyers said.
  • Corrections – Corrections specific to 403(b)s will be added to the Employee Plan Compliance Resolutions System, but operational corrections will not likely be known until the IRS finds plan failures, Salyers said. The IRS is trying to have correctional guidelines in place by 12/31, he added.

Patrick Burke, Jr., Consultant, EPIC Advisors, Inc., told attendees at PLANSPONSOR's 403(b) Summit that sponsors should document all processes in decisions in preparation for an IRS audit. Sponsors should also document vendor difficulties and let the IRS know about them ahead of time, he advised.

If selected for an audit, vendors should be the first notified, according to Burke, as they will be the facilitator of information requested by the IRS. Ask vendors now what support they will provide for an audit, he said.

Plan sponsors should be confident. "The IRS doesn't know your plan, you do," Burke told attendees. He advised sponsors to have an open dialogue with the IRS.

David Levine, Principal, Groom Law Group, Chartered, added that if sponsors disclose issues with the IRS up front, it is usually willing to work on a solution.   If sponsors encounter an uncooperative auditor, they should tell the auditor's manager.

Levine noted that the end of the year will be a busy time for sponsors that also have 401(a) and 401(k) plans because of Pension Protection Act amendments that are due, so it is good for 403(b) sponsors to prepare now for an audit.